Shriram Transport Finance: loans grow, but at the cost of profitability

The new vehicle financing business saw a 1% decline in assets under management.

Updated: Tue, Jul 23 2013. 08 28 PM IST

Shriram Transport Finance Co. Ltd seems to have voted in favour of growth at the cost of margins. Not that it has much choice in a poor macroeconomic environment, where trucker finances are deteriorating owing to increases in diesel costs not being matched by corresponding gains in freight rates. Stand-alone net profit grew 6% over a year ago to Rs.341 crore, falling far short of Street estimates.

In the June quarter, the firm has grown its assets under management 25.2% from a year ago, an improvement over the growth seen in the three months ended March. The pre-owned vehicle business was responsible for this gain entirely while the new vehicle financing business saw a 1% decline in assets under management.

The base effect had a role in this growth; expansion in the June 2012 quarter was only 13.3%. But a major push to Shriram’s loan growth came from its entry into the 2- to 5-year-old pre-owned truck segment in the past half year.

That move may have a certain logic to it as Shriram’s customer base of single or two vehicle owners (as opposed to fleet operators) are probably shying away from new truck purchases because of a tepid economy. With a recovery still some time away, this will also likely ensure continued loan growth for the company. But entrenched competition in this segment and relatively higher loan sizes mean lower margins.

Shriram’s net interest margin fell to 7.01%, a 22 basis points (bps) decline from a quarter ago. It was also 41 bps lower than the year-ago period. That, plus a decline in securitization income, dragged down the firm’s net interest income growth to 12.43%. One basis point is one-hundredth of a percentage point.

New branch openings and addition of auto malls swelled its cost-to-income ratio to 25% in the June quarter compared with 21.87% a year ago. The firm also provided 23.5% as provision against standard and bad loans. All these factors contributed to Shriram’s poor net profit growth. Note that even this growth is coming off a low base, because the firm had posted a decline in net profit in the June 2012 quarter.

Gross non-performing assets for the company grew 45.5% over a year ago. As a proportion of advances it is at 3.09%, a slight decline from the 3.30% at the end of March. While that depicts a measure of stability, concerns over asset quality haven’t entirely gone away.

With wholesale cost of funds again inching up, margins could be under further pressure in the coming quarters. Thus, the firm would have to show sharp loan growth for the stock to have any chance of outperforming the broader market.